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November 27, 2012

The Pendulum Swings One Way

Last night's post about the high cost of fighting enforcement actions by the OCC brought a link from a reader to an article originally posted by attorney Stephens B. Woodrough nine years ago. Woodrough relates the horror story of an OCC enforcement action brought against his client, who is anonymously referred to as "Banker Jones." The story is told from the perspective of an advocate strongly pushing his client's sense of outrage at the treatment of the bullies at the OCC, and it should be kept in mind that it's only one side of the story. However, to those of us who've been in this game for several decades, Woodrough's closing contention is plausible.

At the time the OCC issued the Notice, the agency only pretended to offer Banker Jones the opportunity to exercise his legal right to a hearing. The charges were never issued against Banker Jones for the purpose of assessing a penalty in accordance with the due process procedures set forth in the Federal statutes and implementing regulations. Rather, the sole purpose of the Notice was to initiate the enforcement and adjudication process and to manipulate that process by using it as a weapon to coerce Banker Jones to pay a penalty order issued by consent, or failing in that effort, to inflict a financial penalty in the form of the legal fees and expenses Banker Jones would incur to prepare for an evidentiary hearing the agency had already decided would never be convened.

We've all seen the pendulum of regulatory enforcement swing from lax to zealous and back again as banking "crises" come and go. Perhaps, because the recent crisis was so severe and has been so prolonged, the recent responsive "tightening of the screws" by federal bank supervisory and enforcement personnel has been unusually harsh. Regulators are also under the burden of having the FDIC's Inspector General review every bank failure and come to the unimaginative conclusion that, in practically every case, the responsible federal banking agency did not act quickly or strongly enough. Finally, we have the undeniable fact that politicians and many members of the press and the public are howling for blood, decrying the fact that more "bankers" haven't been made to do the "perp walk" and, therefore, claiming that regulators have been captured by the regulated. Few critics are making distinctions between Wall Street "banks" and Main Street "banks."

Whatever the causes, the pendulum has been, and is still, swinging one way, fast and hard, and that way is not toward "lax."